Unbundling at airlines

The other day, in a group of about 25 “normal people” (i.e. non-pricers), one of them went on a rant about how the airlines are trying to nickel and dime us to death. In particular, this person was especially upset about the new fees for checked luggage, and now even some carry-ons. Being a pricing expert, I calmly explained how this was more fair because people who use the services pay for them and people who don’t use them can pay less. Not a single person agreed with me. They all HATED it.

What is happening?

This is a consequence of a couple things. Recall that unfair means an unexpected change that is not in our favor. This change was certainly unexpected, and the way it was presented it was not in our favor.

The airlines did the equivalent of raise prices. They took away services without an obvious price decrease. The decreased services were noticeable, any associated price decreases were not. Hence, we think this is unfair.

The airlines could have had normal price increases and then offered discounts for passengers without luggage. This would have made the passengers happier, but the one airline who did this would suffer. Most people buy airline tickets comparing the prices that show up on Expedia (or similar) and Expedia doesn’t list all of the fees. If an airline charges higher prices with a discount for no baggage, the higher price shows up on Expedia. Another airline that charges lower normal prices with a fee for baggage has their lower price show up on Expedia. Obviously the airline with the lower normal price will win more business. Consumers are not using the baggage fee as part of their purchase decision.

Remember when the airlines debundled food in coach? They used to serve us a meal, now they try to sell us one. This didn’t create the same outrage, but I remember people complaining about it. Once we got used to it, the bad feelings went away. The same will happen with the baggage fees. In a year or so, people will forget what it used to be like.

We make so many purchases, some bundled, but most unbundled. It seems very interesting to me that the act of unbundling a service can cause so much heartache.

What lesson can you learn? You have to carefully communicate changes in pricing. What if the airlines announced their new policy like this: “Checking and caring for your luggage the way it deserves is expensive to us, and many of you don’t use that service. We will stop bundling baggage service with our flights so those of you who don’t need it don’t have to pay for it. We are lowering the price of all tickets by $50 and offering our baggage service at the rate of $50 per checked bag.”